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New tool aids in evaluation of external auditors

With interactions between audit committees and external auditors a
focus of a steady stream of news recently, a new
tool has been developed to assist audit committees in annual
evaluations of external auditors.

The Center for Audit Quality (CAQ), which is affiliated with the
AICPA, is one of seven organizations that helped develop the tool. It
is designed to help audit committees make an informed recommendation
to boards of directors on whether to retain their auditor.

Public company audit committees are responsible for hiring and
monitoring auditors, and the tool provides guidance on how to perform
those duties. The guidance also could be used by audit committees at
private companies, not-for-profits, and government as well as others
who monitor external audit services, including company boards,
oversight bodies, and even management.

“In assessing information obtained from management,” the tool says,
“the audit committee should be sensitive to the need for the auditor
to be objective and skeptical while still maintaining an effective and
open relationship.”

The tool will operate in a space that has received significant
scrutiny over the past few years. The European Union is debating
mandatory audit firm rotation requirements proposed by the European
Commission. The PCAOB is exploring the idea of mandatory audit firm
rotation for public companies in its
project aimed at enhancing auditors’ independence, objectivity,
and professional skepticism.

In addition, a PCAOB
standard regulating audit committees’ communications with external
auditors has been forwarded to the SEC for ratification.

The new evaluation tool states that public focus on how audit
committees perform, including how they oversee external auditors, has
increased significantly. During a PCAOB hearing in March devoted to
enhancing auditors’ independence and objectivity, audit committee
chair Cathy Lego said audit committee members are devoted to that oversight.

“The audit committee is there on behalf of the board to oversee the
integrity of the financials,” said Lego, who chairs the audit
committees of California-based tech companies SanDisk and Lam
Research. “We are there to appoint, to compensate, to look over the
qualifications, review the independence, and perform an evaluation of
the firms. We do that periodically. We may need to add a little more
rigor around the timing of that, but we do it.”

The new tool says audit committees should evaluate auditors annually
to make an informed recommendation to the company board on whether to
retain his or her services. The tool says the evaluation should assess:

The auditor’s qualifications and performance.

The
quality and candor of the auditor’s communications with the audit
committee and the company.

The auditor’s independence,
objectivity, and professional skepticism.

Sample questions in the tool highlight important areas for
consideration. The guide also encourages audit committee members to
evaluate the auditor’s performance throughout the audit process.

“These contemporaneous assessments provide important input into the
annual assessment,” the tool states. “Audit committees may wish to
consider those contemporaneous observations during a more formal
assessment process, perhaps by using a questionnaire or guide that
considers all relevant factors year-over-year.”

Last week, the CAQ also issued a practice
aid on how external auditors and audit committees should
proactively communicate in a timely and forthright way about PCAOB
inspections and audit firms’ quality-control matters.